EU banks make record payouts despite historic high capital buffers, says watchdog By Reuters

By Huw Jones

LONDON (Reuters) – Capital buffers for banks in the European Union have reached historic highs, with rises in interest rates boosting profitability to support record payouts to shareholders, the bloc’s banking watchdog said on Tuesday.

Since taxpayers bailed out lenders in the 2007-09 global financial crisis, tougher rules have forced banks to build up their capital buffers, with further rises in the pipeline.

The European Banking Authority (EBA) said in an annual report to June 2023 on Tuesday that macroeconomic uncertainty remained elevated, with average common equity tier 1 capital has reached its highest level, at 16%, indicating a resilient 27.6 trillion euro ($29.8 trillion) sector, despite turmoil in the industry in March, particularly in the United States.

“Banks’ headroom above requirements remained at comfortable levels,” EBA said, adding this was helped by stagnating lending volumes requiring less extra capital to be set aside.

Dividend payments and share buy-backs were at record levels in 2022, with banks distributing almost 63 billion euros to shareholders, up from 48 billion euros they had planned at the start of that year, EBA said.

The watchdog’s review of 123 banks from across the EU and wider European Economic Area, produced over 1.2 million data points, an average of 10,000 per bank, which analysts will number crunch to spot trends and vulnerabilities.

EBA suggested that the best may be over, however, as lending slows due to higher rates, with a potential knock-on effect on profitability and asset quality going forward.

Despite stagnating EU economic growth, the ratio of problem loans at banks remained at its all-time low of 1.8% in June, EBA said, adding that impact from a slowdown in real estate markets were a pocket of risk.

Return on equity, a measure of profitability, has risen to 11% in June 2023, the highest since EBA has begun collecting data, up from 7.9% a year earlier and almost all due to higher net interest income.

($1 = 0.9270 euros)